Buy City Union Bank Ltd for the Target Rs 300 by Emkay Global Financial Services Ltd
City Union Bank (CUBK)’s credit growth continues to accelerate, up ~27% yoy and 7% qoq in 2Q. This, coupled with steady loan yields and stable COF, helped the bank recover margin to 3.88% from 3.78% in 1Q, with PAT at ~Rs4.2bn (27% yoy/~9% qoq) and ROA at ~1.6%. Provisions were slightly higher than expected, as the bank continued building up contingency provisions. Despite an estimated ECL impact of Rs3bn, of which Rs300mn has already been provided for, management expects the remaining Rs2.7bn to be adjusted against capital, with no impact on P&L. With 55% of loans EBLR-linked, management expects NIM to remain at 3.85-3.95% in 3Q-4QFY27, supported by repo rate hike. It remains cautious on sustaining 21–22% deposit growth over the next two years amid competition while targeting credit growth 2–3ppt above industry growth. We expect the bank to report a strong ROA of ~1.6-1.8% over FY27-29E. This, coupled with a strong capital buffer and improving retail orientation, should help the bank sustain a premium valuation, in our view. We retain BUY and TP of Rs300, valuing the bank at 2.0x Sep-28E ABV.
Strong growth; margin outlook positive
CUBK’s credit growth accelerated to ~27% yoy/~7% qoq, led by strong momentum in SME (+22% yoy) and agri (+32% yoy). Management remains focused on secured lending and reiterated its target of achieving credit growth 2–3ppt above the industry. However, it expressed caution about sustaining deposit growth of 20%+ over the next two years. NIM uptick was driven by better loan growth and stable COF. Around 55% of the loan portfolio is EBLR-linked, providing scope for asset-side repricing following policy-rate changes. Management expects NIM to remain at 3.85–3.95% over 3Q-4Q.
Asset quality continues to improve
Asset quality continued to improve with contained slippages of Rs1.75bn (1.2% of loans), supported by better recoveries and write-offs, leading to a 29bps qoq improvement in GNPA ratio to ~1.4% and NNPA to ~0.5%. Gold-loan asset quality also remained contained, with SMA accounts of Rs1.73bn or 0.24% of gold advances, and gross NPAs of Rs950mn; management stated that only Rs2mn had proceeded to auction. Management indicated that Rs300mn had already been provided for, with the remaining Rs2.7bn ECL requirement to be adjusted against capital, resulting in a 0.40–0.45ppt capital impact, with no impact on the P&L.
We retain BUY
We expect the bank to report a strong ROA of ~1.6-1.8% over FY27-FY29E. This, coupled with a strong capital buffer and improving retail orientation, should help sustain premium valuation. Hence, we retain BUY and TP of Rs300, valuing the bank at 2.0x Sep-28E ABV. Key risks: Macro deterioration hurting asset quality, higher ECL hit, and KMP attrition in its retail banking team
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